Problem 10-1B Computing bond price and recording issuance P1 Round dollar amount

Question

Problem 10-1B

Computing bond price and recording issuance P1

Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used.

Flagstaff Systems issues bonds dated January 1, 2015, that pay interest semiannually on June 30 and December 31. The bonds have a $90,000 par value and an annual contract rate of 12%, and they mature in five years.

Required:

For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2015, and (b) prepare the journal entry to record their issuance.

1.The market rate at the date of issuance is 10%.

2.The market rate at the date of issuance is 12%.

3.The market rate at the date of issuance is 14%.

Check(1) Premium, $6,948 (3) Discount, $6,326

Explanation / Answer

1.The market rate at the date of issuance is 10%.

N=5*2(semi annual payemnts), I/Y(market rate)=10%/2, FV=90000, PMT= 12%/2*90000=5400

Solve for PV

PV= 96948

Thus Premium = 96948-90000=6948

Bonds Payable 90000 credit

cash 96948 debit

Premium 6948 debit

2.The market rate at the date of issuance is 12%.

N=5*2(semi annual payemnts), I/Y(market rate)=12%/2, FV=90000, PMT= 12%/2*90000=5400

Solve for PV

PV=90000

Bond issued at par.

Bonds Payable 90000 credit

cash 90000 debit

3.The market rate at the date of issuance is 14%.

N=5*2(semi annual payemnts), I/Y(market rate)=14%/2, FV=90000, PMT= 12%/2*90000=5400

Solve for PV

PV= 83678

Discount= 90000-83768=6322

Journal entry

Bonds Payable 90000 credit

cash 83768 debit

Discount 6322 debit

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